(This is third in a series of articles about blogging and taxes. Part one is here. Part two is here.)
What did I tell you we were going to talk about today? My brain is a little fried from work these days. Oh, yes. dun duh dunnnnnnnnnnn - the.....
BUSINESS DEDUCTION
This is the big one, what everybody wants to know about. "I know I've got income but what can I use to reduce that income?" The IRS says that you can take any reasonable expense that is ordinary and necessary in order to run your business. Since you're in the business of taking over the internet, that gives you some idea as to where to start.
This is a good starting point (it's bullet time!)
- hosting fees
- a percentage of your internet connection costs that are attributable to business use
- mailing expenses for prizes
- cost of your website design
- office supplies used for business
- travel (which includes travel by air or by car to conferences)
- conference fees
- equipment like computers and printers and servers for your business and depreciation on that equipment
- gifts that you purchase to give a way - these are limited to $25 per person per year
- Legal & accounting services
- Advertising you do on other blogs
- professional organization dues
- Babysitting services (if your spouse works) can be eligible for the childcare credit
If you purchase any of these items on your credit card, they are deductible when they are charged, not when you actually pay for them.
These things are not deductible:
- Fines
- Penalties
- Kickback
- Bribes
- any amounts paid or incurred in dealing controlled substances
Wait, those probably don't apply to you. If they do, you run in very cutthroat mommy blogger circles.
No matter what that person at the walk in walk out with a refund loan place says, normal business type work clothes do not count as a uniform. So those cute Old Navy pajama pants? NOT DEDUCTIBLE. Only if you have an actual uniform that you pay for and is required by your employer. Steel Toe boots deductible. Bunny slippers - not deductible.
If you can make an argument that an expense is necessary for you to conduct and grow your business, the IRS says try us.
A HOBBY LOSS CAN STOP ALL THIS DEDUCTING IN ITS TRACKS
If you consistently have a loss on your Schedule C, the IRS can start disallowing that loss unless you have income in three of the last five years. So deductions are good to a point, but if you think you're going to consistently reduce your tax liability by deducting the two cases of diet cokes you drank this week as an office supply, you're out of luck. The IRS isn't going to let you do it. Once you don't meet the test for a business anymore, you have to start reporting your losses as a hobby loss.
I know what you're thinking hobby=good=holly hobby=hobby horse=hobby like knitting=hobby like interneting, right? Wrong. The IRS treats hobbies like they don't even exist, that is, until you start making money again. (of course they do.)
Hobby losses are only deductible to the extent of income produced. The are subject to the 2% floor on miscellaneous Itemized deductions. That means if you make $500, you can only take expenses of $500. Not so fast though, you have to take you regular income, multiply it by 2%. Take only $500 of expenses and if the $500 is OVER the 2% number you calculated, you get to take a deduction for the portion that is over the 2%. Basically you get gypped. And if you don't itemize, you don't get anything for a deduction. So don't try throwing in the kitchen sick when you're figuring your deductions. The IRS will start cutting you off from the refund gravy train after about 3 years.
So does that clear up your business expenses questions?
WHAT KIND OF FORMS MIGHT I NEED?
Form 1065 for an LLC and
OTHER STUFF YOU NEED TO KNOW
If you are making significant money, or will have income reported to you from your LLC on a K-1, you may need to make estimated tax payments. These will keep you from getting an underpayment penalty and from having a heart attack when you see what kind of tax you owe.
If you are selling things, you may beliabile for collecting and remitting sales taxes in your jurisdiction for sales in that jurisdiction. There's also the issue of Use taxes for items you purchased that no sales tax was charged to you on. In most states you are required to report these purchases and pay your home city, county and state sales tax on those purchases. Compliance to these rules are EXTREMELY LOW as I'm sure you can imagine. But It's the law. If those zappos shoes are worth and some extra money in penalties and interest to you if you get caught, then it's up to you.
If you are a single member LLC, there's not a federal filing requirement but each state has different rules and may have a franchise tax that is due on an entity level basis. They will revoke your charter if you don't file and pay these type things and it's best to just do it and get it over with.
Hit me with your best shot! you got any questions?
I hope this has been helpful. Ya'll stay out of trouble with the IRS, now, you hear?
Don't forget about my giveaway. It's open until Friday and is a great deal for anyone with allergies.
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I do work like this and more for a internet based businesses, and I can help you!
DISCLAIMER: Any tax advice was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
This SHOULD be making me feel better: here is ALL the information I've been wondering about for the first upcoming tax season where I'll have blogging income to report. And yet now I am PANICKING. Ack ack ack!
Posted by: Swistle | January 15, 2009 at 12:11 PM
Dude. I AM a CPA and I am OVERWHELMED here. You may be the smartest person I know. I'm ALMOST to the point of throwing my Quicken file at you and saying HERE YOU DO MY TAXES! Wowsa. In a roundabout way, I'm trying to say how impressed I am by these posts!!!
Posted by: CPA Mom | January 15, 2009 at 05:16 PM